What if you write off an intercompany or directors loan? 1

with computer

Connected party loans are a problem area especially if the loan is impaired (ie the borrower may not be able to repay the debt)

Individual Loans written-off

If an individual makes a loan to a company and this is subsequently written-off, the company will have a non-trading loan relationship credit equal to the amount written off.

If the loan was made to an unquoted trading company, the individual will crystalise a capital loss equal to the amount of the loan written off. This will be available to set off against capital gains arising in the year of write-off or in subsequent years.ACCA

The situation, however, becomes more complicated where the parties are connected. The general rule is that where the debtor and creditor in a loan relationship are connected in any part of an accounting period and the whole or part of a loan is written off, then this is effectively a ‘tax nothing’, ie the creditor company cannot claim relief for the amount of the loan written off and the debtor company does not incur a taxable loan relationship credit.
There is, however, an exception to the above when the creditor company is in insolvent liquidation; a creditor company may claim an impairment loss in these circumstances.

 

Loans swapped for Shares

Often Loans are swapped for equity and then subsequently a claim for negligible value is made.

A negligible value claim enables you to set a capital loss against your income (or against other capital gains if you have them) for earlier years and claim a tax refund.

Many negligible value claims are made by shareholder directors whose company has failed. Their claim is to offset the loss on the shares in their company against their directors’ wages for earlier tax years.

When a taxpayer owns shares which become of negligible value the taxpayer may make a claim under s24 TCGA 1992, resulting in a deemed disposal and reacquisition, which crystallises a capital loss.

Intercompany Loans

Accounting standards require companies to assess their assets at the end of each period to ascertain whether there is objective evidence that particular assets are impaired.  So if a loan can’t be repaid it would be impaired and may require a provision for bad or doubtful debts at the year-end which may well lead to the eventual release of the loans in question.

The problem is that for connected businesses this can create a double whammy on tax! tax relief is denied in respect of the debit to the creditor company’s profit and loss account.  The credit recognised in the debtor company’s accounts can be taxable.

Where the creditor and debtor are connected companies, the connected party rules will apply to the release. This means that the release debit in the creditor’s accounts will not be allowable, because of CTA09/S354. Similarly, the credit in the debtor company’s accounts will not be taxable, since CTA09/S358 applies, unless the release is a ‘deemed release’ as defined in CTA09/S358(3) (CFM35440) or a ‘release of relevant rights’ under CTA09/S358(4) (CFM35510).

Since the release is, for both parties, dealt with under loan relationships, the priority rule in CTA09/S464 means that the creditor’s loss cannot be claimed, nor the debtor’s profit taxed, under the normal provisions for trading income. Nor can the credit in the debtor’s accounts be taxed under CTA09/S94 (debts incurred and later released).

Trade debts or loans between companies within a group may not uncommonly be released when either the debtor or the creditor company (or both) is dormant, as part of a ‘tidying-up’ exercise to enable dormant companies to be struck off. If this is all that happens, HMRC would take the view that the recording of an accounts profit – which is not taxed – in a dormant debtor company does not result in that company starting to carry on a business, and therefore does not start an accounting period under CTA09/S9. HMRC CFM41070

Two companies are connected for an accounting period if one controls the other or both are under the control of the same person (s 466) and companies are connected for the whole of their respective accounting periods if the control test is met at any time during those periods.

One possible solution could be a Deed of Release or Waiver executed in the accounting period in which the loan is released, but this would need to be properly drafted. The credit to the debtor company’s profit and loss account will then be able to be treated as non-taxable and as such avoid the double tax treatment.

steve@bicknells.net

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Goodbye to Corporate Directors…. Reply

dreamstimefree_75244

Corporate Directors have been particularly useful to Groups, its easier and more flexible to show the parent company as the director than to name a specific person, but as a result of the Small Business, Enterprise and Employment Act 2015, companies will no longer be allowed to have corporate directors.

The ban will come into effect in October 2015 and companies that have Corporate Directors have until October 2016 to remove their corporate directors.

However, the government may have a change of heart following its consultation on whether Corporate Directors could be allowed if the Corporate Director Company has a board of fully disclosed individual directors.

steve@bicknells.net

Would a Partial Capital Allowance Claim reduce your tax bill? Reply

Businessman get idea

It is not necessary to claim the maximum capital allowances available or even claim them at all, crazy as it might sound there are situations when not claiming capital allowances can reduce your tax bill!

Sole Trader Example

The personal tax allowance is currently £10,600 (2015/16)

Lets assume profits are £15,000 and Capital Allowances available are £5,000, so that would reduce taxable profits to £10,000 which would waste £600 of the personal tax allowance.

It would therefore be better to only claim £4,400 in capital allowances and claim the remaining £600 in the following year.

Company Example

Companies within a Group can only offset losses in corresponding tax periods, so if the the capital allowances increase the loss in one part of the group beyond the profits of the rest of the group then there would be no benefit to claiming them in that period.

Companies can claim capital allowances in any of the following 3 tax years.

There is an excellent example of this in the following blog http://taxnotes.co.uk/a-basic-introduction-to-capital-allowances/

steve@bicknells.net

If I change my business activity what happens to my tax losses? Reply

business man in a crisis

Let’s say your current business has been having a tough time and you want to change it to something new, can you carry forward the trading losses.

Probably not look at this example from BIM85050

For example, a publican who had owned a pub in Leeds for many years sold it and bought another in York. Although in the everyday sense the trader remains a publican throughout, the York pub is not the same trade as the Leeds pub.

Tax law requires any losses (including Corporation Tax Losses) carried forward to be offset against future trading profits from the same trade.

One solution to this may be Group Relief, companies which are part of the same Group can surrender losses within the Group.

The rules about which trading losses and other amounts may be surrendered are described at CTM80110. The company that transfers the losses, etc, is called the ‘surrendering company’. The company that claims the losses, etc, is called the ‘claimant company’.

Trading losses, excess capital allowances and non-trading deficits on loan relationships may be surrendered in full. This is irrespective of whether the surrendering company has other profits against which the loss etc might have been, but has not been, set off.

Alternatively it may be possible for the loss making business to sell services to the new business and in doing so reduce its loss.

steve@bicknells.net

Associates don’t have to be taxing Reply

The small companies rate of Corporation Tax is 20% compared to main rate of 24% (2012/13). The small company rate is applied if your profits are below £300k, however, if you have associate companies, the £300k is spread between them equally.

For the purposes of CTA10/S25 (4), formerly ICTA88/S13 (4), a company is an associated company of another at a given time if at that time:

  • one of the companies has control of the other, or
  • both of the companies are under the control of the same person or persons

http://www.hmrc.gov.uk/manuals/ctmanual/CTM03710.htm

But what some business forget is that if you have a subsidiary that has become dormant it stops being associated

an associated company which has not carried on any trade or business at any time during the accounting period is disregarded – if it is an associated company for part only of the accounting period, the rule applies to any time during that part.

http://www.hmrc.gov.uk/manuals/ctmanual/ctm03580.htm

steve@bicknells.net

Practical Uses for Hive Up and Hive Down 3

Many Groups consist of trading and non trading businesses and often assets will get left behind in non trading businesses or businesses that only exist to cross charge their services, this is inefficient, to make a Group work efficiently assets need to centralised. But how can you do that?

Hive Ups and Hive Downs refer to the transfer of a business or assets within a group company.

What is a Hive Up?

A Hive Up is where a business or assets are transferred (or hived up) to the parent company.

What is a Hive Down?

A Hive Down is effectively a reorganisation of a company whereby a business or businesses are transferred (or hived down) to a subsidiary.

What could you Hive?

  • Assets
  • Clients
  • Trade

How do you Hive?

You need to sell the assets at their market value between the companies and to be a subsidiary a company must be 75% owned by its parent.

HMRC have rules to prevent loss buying ie buy a business with losses and use the losses to cut you tax bill, the rules are set out in CTM06300 http://www.hmrc.gov.uk/manuals/ctmanual/CTM06300.htm

It isn’t possible to get HMRC Clearance prior to a Hive Up or Hive Down but provided everything is fully disclosed and there are good commerical reasons for Hiving its likely HMRC will be supportive.

As always, if in doubt, seek advice.

steve@bicknells.net

Group Corporation Tax – why not have a simplied arrangement? 1

Its often worth having a Tax Group even if you don’t have Group Accounts ie you have multiple businesses under common control but that are not directly owned subsidiaries. The reason for this is to offset profits and losses to reduce the total tax payment.

Generally this means completing a special extra return, the CT600C, unfortunately, this form is not available from HMRC to file on line.

There is a solution regulation 6 SI199/2975 (CTM97690) allows you to write to HMRC and explain which companies make up the group and ask for a simplified arrangement – meaning HMRC will automatically net off the returns with out the need for CT600C returns.

By doing this you can file the CT600’s on line for free with HMRC.

steve@bicknells.net